The International Monetary Fund (IMF) has claimed that China risks facing a growing debt-dependency in its banking system, urging Beijing to increase its capital buffers to protect against a possible “financial crisis.”

The Washington-based organization said in a report on Thursday that reforms by Beijing over the past five years had not gone far enough as financial credit in the world’s second-biggest economy had risen high by international standards, and personal debt had also increased in the same period.

“The system’s increasing complexity has sown financial stability risks,” the IMF’s assessment report said. “Credit growth has outpaced GDP growth, leading to a large credit overhang. The credit-to-GDP ratio is now about 25% above the long-term trend, very high by international standards and consistent with a high probability of financial distress.”

The IMF recommended that China prioritize financial stability above development goals as the pursuit of regional growth targets and the protection of failing companies had led to a surge in debt, particularly at local government levels.

“The apparent primary goals of preventing large falls in local jobs and reaching regional growth targets have conflicted with other policy objectives such as financial stability,” the report said. “Regulators should reinforce the primacy of financial stability over development objectives.”

“As a result, corporate debt has reached 165% of GDP, and household debt, while still low, has risen by 15 percentage points of GDP over the past five years and is increasingly linked to asset-price speculation. The buildup of credit in traditional sectors has gone hand-in-hand with a slowdown of productivity growth and pressures on asset quality,” the IMF said.

The report also said that while China has been taking steps to address its debt risks, authorities in Beijing are required to “de-emphasize the GDP” projections to be able to rein in excessive credit growth in national plans that have incentivized local governments to set high growth targets.

Ratna Sahay, the deputy director of the IMF’s Monetary and Capital Markets Department, said during a news conference that China should “incite local governments to strengthen supervision on risks.”

“Risks are large,” Sahay told reporters. “Having said that, the authorities are really aware of risks and they are working proactively to contain these risks.”

The IMF report also highlighted the need for Chinese banks to hold more liquid assets and gradually increase their capital to create buffers to absorb potential losses that could be expected during China’s economic downturn following a credit boom.